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Worry-Free Option for Retirement Income


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Nobody really knows if the stock market is going up or down tomorrow let alone six months from now – unless they are breaking the law.  U.S. stocks and the S&P 500 did fall 1.1 percent last week, ending the longest streak of advances this year, as speculation grew that the economy is recovering enough to justify higher interest rates sooner than anticipated.

While the market has since recovered (and then some), from the great recession,  the experience has left an emotional scar and financial distrust among those already retired or close to retirement, especially with near 0% safe returns seriously impacting retirement income expectations.

Whether you are already retired or just approaching retirement, an important topic to consider is how to get a good return on your investments. At this point in life, you want to be able to live off the income from your investments, enjoying the freedom of retirement without having to worry about the financial side of things.

To accurately prepare for an unknown period of time, your portfolio not only needs to provide you with necessary income, but also grow enough to increase that income for as long as you need it.  As you organize your retirement savings portfolio, it is important to start with setting aside an important sum of money for emergency purposes then look at investment options.

Remember that every type of investment comes with certain risks, so it’s important to be aware of that.  Risks may sound scary, but planning early can help keep retirement income intact.

Longevity risk is the risk of outliving your money.  Perhaps the hardest part of planning for retirement is the unknown length of time you will spend in retirement. Will you need income for 15 years, or 35? The longer the retirement period, the greater the impact the other retirement risks such as sequence risk and inflation risk, can have.

With increasing lifespans, you may spend 30-40 years in retirement. During working years, raises tend to offset the effect of inflation risk; in fact, income often grows faster than inflation. In retirement, however, inflation can be much more challenging because you are generally living on dividends and interest generated from your investment portfolio.

Sequence risk is the risk of receiving lower or negative returns early in a period (like retirement) when withdrawals are made from the underlying investments. The order or sequence of investment returns (not just the total overall return) can have a significant impact on retirees who are living off the income and capital of their investments.

You can have two portfolios with the same average return, the same amount of withdrawals and the same level of volatility, but if the negative returns occur in the beginning of retirement, that early decline will have a greater impact on the portfolio than if the drop occurred at the end.

No matter how good your investment returns are, the portfolio can only sustain a certain level of withdrawals over time (usually in the 3-5 percent range). This is referred to as withdrawal rate risk. In retirement, if you overspend (and withdraw too much from your investments), you run the risk of jeopardizing future spending ability.

The aim of setting a safe withdrawal limit is to ensure that you do not draw so heavily on your retirement savings – particularly when the market is down – that your capital cannot sustain your income throughout your retirement.  It is suggested that you do not have to adhere to this “safe maximum” if you invest in a portfolio that is designed to generate a growing income.

If you are nearing, or already into retirement and you want to maintain a secure income stream, pass a steady income to your spouse, or gradually transfer an inheritance to your grandchildren. One of the investment options available to look at is an annuity.

An annuity is a financial product that pays you a regular income for a fixed period, or the rest of your life. They are often used for transforming a lump sum of money into a dependable income stream. Joint and survivor life annuities cover the lives of two individuals and payments are made as long as either you or your joint annuitant lives.

Life annuities provide a guaranteed income for as long as you live, helping to ensure you will not outlive your money. This is another worry-free option for retirement income. Annuities are issued by insurance companies, and they take on the risk. You give them a lump sum up front to buy the annuity, and in return, they agree to give you a fixed monthly income for the rest of your life. The longer you live, the more they need to pay out, so you never need to worry that the income will run out while you still need it

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Monday, September 15th, 2014 Wealth Management Comments Off

Foundational Building Block of Your Retirement Income

The market has hit new highs. Participating in the stock market can give an individual’s retirement savings and income the potential to keep pace with inflation, however, volatility in investment markets can significantly affect retirement income and savings.

Eventually, the market will be higher than it is now.  But for the first time in a long time, people need to understand that just because something has not happened yet does not mean that it is not going to happen. . Even though we are repeating so many of the same patterns that we witnessed in 2000-2001 and 2007-2008, most people do not think that another financial crash is coming.

People have such short memories.  The 2008 market downturn created uncertainty about where and how to invest retirement dollars. These recent economic events should have taught us the downside of risk.  Many investors, especially retirees, learned that market changes don’t always mean big returns, and as such, have developed a lower tolerance for risk.

This, coupled with the fact that people are living longer and need to rely on retirement income for a longer period of time, with the possibility that they could outlive their resources, makes considerations about where to store or invest retirement dollars increasingly important.

Despite the Dow hitting pre-crash highs, companies reporting positive earnings, and the financial media saying we are looking at the “beginning of a new bull market,” the stock market is on the verge of another historic collapse.  In fact, with the stock market setting record high after record high lately, it’s unlikely that a stock market crash, or even a major correction, will occur of its own accord.  However, that can happen at any time.

But without this type of negative surprise, the lack of alternatives to equities continues to be the main support for the bull market — just as it has been for the past five-plus years.  The most important driver of this bull market — the lack of compelling alternative investments to equities — is firmly in place.

Anyone with skin in the game knows that the zero-interest-rate policy of the U.S. Federal Reserve has taken a huge swath of potential investments off the table for any purpose other than safety of principal.  With so much cash needing to be put to work, few investors are waiting for a double-digit correction to boost their allocations to equities.

The overall market (let’s say, the S&P 500) price is a function of supply and demand. So what is “Supply” in terms of the stock market? Answer: it’s the total number of shares outstanding.  What is “Demand”? It’s the appetite to buy shares.  Supply is going down. This is both a good thing and a bad thing.

The good: Companies have enormous profit margins and are using their excess cash to buy back shares. This, of course, reduces shares outstanding. When supply goes down, price goes up. This is why the stock market right now is at all-time highs.

Meanwhile, supply is going to flatten out. There’s only so much stock that people can buy.  So Demand will probably remain the same, but now Supply will stop going down.  What happens then? Stocks go down. Or struggle to stay afloat.

It is said that value investing works better than just about any other approach to investing in the markets.  I’m a little worried because I think there is a bubble in the middle of the Wall Street economy.  Volatility is the toughest issue to deal with because the pipelines are getting bigger and bigger through which money goes. It allows it to go in quickly. It allows it to go out quickly.

If you were a person who had his or her retirement savings in the stock market, would you be worried?  Yes ..I’m among those who felt it was an inflated price bubble for a long time, several years, and it keeps going up, defying all sorts of predictions. Nevertheless, one of two things has to happen.

Either the stock market will go down considerably. We hope not all at once, but dramatically -.or those people who have invested their money in the stock market are going to be disappointed by the return. Just simple arithmetic–if you paid an over-valued price for a stock, you’re going to get a smaller return than you anticipated. I don’t think we can escape from one or two of those consequences.

With an ageing population, rising living costs and longer life expectancy, the need for greater financial security has become even more pressing.  Because of this aversion to risk, many clients have found a fixed annuity purchase can help enhance their investment goals.

Fixed annuities provide a guaranteed rate of return and are a practical option for investors who don’t want to gamble with money they’ve worked hard to accumulate for retirement. Many older clients are indeed looking to annuities because in a low-rate environment, other options like CDs are not providing the returns they once did.

One thing we’ve seen for older clients who are used to being in fixed products is that they reached a point where they are underwhelmed and impatient. A deferred annuity enables workers to accumulate savings on a tax-deferred basis, until it’s distributed.

Depending on the purchaser’s choice for distribution — a payment stream, or in some situations, a one-time lump-sum payment — a fixed annuity ensures that a nest egg is fully protected and available to the purchaser when he or she is ready to use it.

  • An annuity can be timed to start distributions on or around a purchaser’s retirement date, ensuring that funds are available to help maintain the purchaser’s standard of living.
  • An annuity can be timed to start distributions for a specific period of time or to ensure a purchaser cannot outlive his or her income.  Annuities will give you a basic, guaranteed payout.
  • Some annuities are linked to inflation so your real income will not be eroded by higher costs of living.
  • Some plans encourage couples to plan for their retirement jointly so that in the event of a death, the surviving spouse will not be left stranded financially.

The fear of not having sufficient resources in old age is not a recent phenomenon.  You should not rely solely on your annuity savings for your retirement income. Instead, you should view it as the foundational building block of your retirement income, where you can get a monthly payout for life under the lifetime settlement option.

If you are looking to boost your retirement income through investments but do not have the risk appetite to withstand the volatility of the stock, bond or currency markets, you could consider annuities.

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Wednesday, September 10th, 2014 Wealth Management Comments Off

Playing The Back Nine

Here it is – the ‘ back nine’ of my life and it catches me by surprise.  How did I get here so fast?  Where did the years go and where did my youth go?  I remember vividly seeing older people through the years and thinking that those older people were years away from me and that ‘I was only on the first hole’ and the ‘back nine’ was so far off that I could not fathom it or imagine fully what it would be like.

Life is like 18 holes of golf.  On the Front 9 you accumulate wealth and on the Back 9 you take it out…..and, while not everyone will live to 90, we are living longer in retirement than our prior generations.  As a result preparing for the Back 9 needs to be a priority in our life.

If you’re like most people in or nearing retirement, you’re probably at least a bit worried about running through your savings too quickly. When retirement is rapidly approaching or you are already retired, you are not living in the long-run, you are living in the today, and fear can be debilitating.

Living longer, healthier lives is certainly an exciting proposition, but ensuring that your retirement savings will last 20 to 30 years, and possibly longer, is the challenge. So it’s no surprise that research has shown that retirees who receive guaranteed income — whether from a traditional check-a-month-for-life pension or a lifetime income annuity— tend to be happier in retirement.

Advancements in medical technology are great news if you want to live a long time. We are seeing shifting approaches to retirement as people stay healthier for longer. Wellness experts have long noted connections between personal finances and health. Trouble is, life isn’t so easy and exact. Any number of unforeseen events—most of which you have no control over—can wreak havoc with your retirement plans.

Retirement planning has three steps – accumulation, preservation and distribution. In accumulation stage you invest in different investment products based on your risk profile and time horizon towards retirement. Preservation and distribution stages go parallel to each other and these stages come after getting retired. In these stages the main goal of investor is to preserve the amount accumulated and also keep on getting some income out of it to take care of retirement expenses.

The bad news is that you cannot afford to lose money as you approach retirement or during retirement; the penalty is too costly. Even more debilitating can be the mere thought of another market crash. You don’t have to look back very long to find periods when the stock lost 50% or more of its value. That happened between 2000 and 2002 and again between 2007 and 2009.

Systematic withdrawal’s is a method in which a retiree, after retirement, systematically withdraws a portion of their savings with the intent (but with no guarantee) of making that money last for life. The 4% rule is often presented as a virtually fail-safe strategy for making sure you don’t run through your savings during retirement.

Just withdraw 4% of your nest egg the first year of retirement, increase that dollar amount each year by inflation to preserve your purchasing power, and you have an 80% to 90% assurance that your savings will last at least 30 years. But it’s not quite that straightforward.

If you’re unfortunate enough to get hit with such a big loss, or even an extended period of weak gains, especially early in retirement, the chances of your retirement savings lasting 30 or more years with 4%-plus-inflation withdrawals can drop from 80% or 90% to 60% or lower.  The most dramatic result is that the systematic withdrawals-constant amount exhausts a retiree’s retirement savings at 20 years and the projected retirement income drops to zero.

The reason is that the combination of your withdrawals and investment losses can so deplete the value of your portfolio that you just don’t have enough capital left to repair the damage when the market eventually turns around. .

The marketplace is chock full of investment products with names that include the words “income” or “guarantee” and sound very secure and pension-like. However, there are many shackles preventing the development of retirement income products with risk management features such as annuities.

Annuities are one of the only guarantees that you can get in life. An annuity is a continuing payment that has a fixed annual amount. Annuities can exist for a specific period of time, or they can last a lifetime, but the bottom line is that you have that income when you need it.

A guaranteed minimum withdrawal benefit (GMWB), which is a hybrid annuity that combines the features of annuities with the features of systematic withdrawals. This annuity is also known as a “guaranteed lifetime withdrawal benefit” (GLWB).

Often, people may be thinking about annuities framed in terms as a gamble on the possibility of a long life, rather than as a risk reduction measure aimed at improving that possible long life.  With your income guaranteed forever you can rest assured that your retirement will be safe and secure. If you invest in a way that, no matter what, your basic income needs are covered you never have to worry about the markets ups and downs ever again.

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Saturday, September 6th, 2014 Wealth Management, Wealth Preservation Comments Off

Red Zone Multitasking – Long Term Care Annuities

It is not unheard of – or even uncommon – for long term care insurance policyholders to receive a letter that tells them that when they renew their coverage for the next year, they will face increases in premiums that will be higher than 50 percent. This, regardless of claims history, heath status, or even age.

One of the things that can discourage people from buying long-term-care insurance is the idea of paying a lot of money for a policy that with any luck they’ll never have to use.  One way to avoid spending a lot of money directly on a long-term-care policy while still getting its benefits is to buy an insurance policy with a long-term-care rider.

Baby Boomers like the “red zone multitasking” nature of these hybrid policies, as they offer an annuity in addition to a long-term care component. That means that the premiums wouldn’t go to waste if the purchaser doesn’t end up needing long-term care.

Long-term care insurance is designed to protect your assets and provide coverage in the event that you require care at home or in a facility prior to leaving this world. The care could be custodial in nature or skilled care. The average stay in a nursing home in this geographic area is over $300 a day. That equates to over $109,000 a year. These are significant numbers.

Health insurance is designed to cover medical expenses, whereas long-term care insurance covers help with daily activities like washing, dressing, and bathing. Medicare doesn’t pay for any custodial care, whether rendered in the home or a facility. Medicare will cover very limited nursing home stays when skilled nursing care is required. So if you don’t have long-term care insurance, you’ll need to pay for such costs out of pocket, unless you have very little income and can qualify for Medicaid, the federal-state health program for low-income people.

Long-term care annuities – Even though traditional long-term care coverage is still the best in my opinion, long-term care type annuities are offered in two versions, simplified and guaranteed issue. In a perfect world, they should only be used as supplemental coverage to traditional long-term care, but annuity long-term care coverage allows you to fully control the principal in case you never access the benefit.

Most policies have few restrictions on how you use the money. Once you meet the qualifications, usually the inability to manage two of the six activities of daily living (eating, bathing, dressing, toileting, transferring and maintaining continence, or cognitive impairment), how you spend your money is up to you. You can pay a neighbor or a family member to help out or use the tax-free payments to augment other money that you have available.

These hybrid policies work variously, but the type that has gotten the most attention is a long-term-care annuity. Beginning in 2010, the IRS will let those who hold one of these deferred annuities use the money to pay for long-term care free of federal taxes. Annuities allow money to grow tax-free, but the tax man has to be paid when the money is removed. These long-term-care annuities free holders from this obligation.

Most hybrid deferred annuities operate this way: Purchasers put money — $50,000 is about the minimum — into an annuity. These also can be funded with another annuity or a whole or universal life insurance policy that the owner no longer needs through what the IRS calls a 1035 exchange.

Purchasers then choose the amount of long-term care coverage they want, usually 200 percent or 300 percent of the face value of the annuity, and they decide if they want inflation coverage. They also have to decide how long they want the coverage to last, usually two to six years. Inflation coverage will affect the maximum duration of the plan.

The person who purchases a hybrid annuity/long-term care policy and does not touch the long-term care coverage will be able to tap the annuity for income throughout his or her long lifetime.  When long-term care coverage is needed, the value of the benefit is subtracted from the value of the annuity.

Another benefit, at least in theory, is that hybrid policyholders will be insulated from the premium hikes that purchasers of long-term care policies have confronted in recent years. The hybrid policies typically require an upfront lump-sum premium, whereas long-term care premiums are usually paid on an ongoing basis, often annually.

Hybrid policies may be appropriate in certain instances. One of the key situations would be if an individual would not otherwise qualify for a pure long-term care policy due to health factors; he or she may in fact be able to qualify for a hybrid policy, especially an annuity/long-term care hybrid. Some policies offer “simplified underwriting,” which means that no physical or medical records are required; rather, the applicant may have a telephone interview with a nurse about his or her health.

In addition to a long term care strategy there are the six documents you need for a solid red zone estate plan:

• Joint Ownership — Enables you to own property jointly with another person and upon the death of the joint tenant, the surviving joint tenant automatically becomes the owner of the property.

• Last Will and Testament – A legal document which expresses the wishes of a person concerning the disposition of their property after death and names the person who will manage the estate.

• Durable Power of Attorney – Grants authority to another individual to act on behalf of the person who executes the instrument and are commonly used for legal and financial purposes.

• Durable Health Care Power of Attorney- Grants authority to another individual to make health care decisions on your behalf should you be unable to make such decisions.

• Advance Care Directive – A set of written instructions in which a person specifies what actions should be taken for their health, if they are no longer able to make decisions due to illness or incapacity.

• Living Trust – Created during your lifetime. Assets are transferred to the trust while you are alive. Provides written instructions for the disbursement of the trust assets upon your death.

These documents can play a vital role in the major plays during the fourth quarter of your life. Understanding how they work now can make the difference between a last-minute victory or loss.”

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Wednesday, September 3rd, 2014 Wealth Management Comments Off

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